Findings of Bad Faith on the Part of a Municipality Upheld by the Court of Appeal

March 5, 2019

In a unanimous decision rendered on December 4, 20181, the Quebec Court of Appeal dismissed the appeal filed by the City of Dollard-des-Ormeaux (“DDO”) of a judgment rendered by Superior Court Justice Pepita G. Capriolo on July 19, 20162.

In this matter, DDO had sold a parcel of land to 4164717 Canada Inc. (“Canada Inc.”) on the condition that it build a real estate project as outlined in the sale contract. Following a six-day trial, the judge concluded that through its conduct, which she considered to have been in bad faith, DDO effectively prevented Canada Inc. from performing the project.

The judge accordingly declared the sale contract dissolved and ordered DDO to reimburse the sale price to Canada Inc., as well as the municipal taxes it had paid since the sale. She also acknowledged Canada Inc.’s right to claim damages from DDO.

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The facts of the case, which are somewhat complicated, can essentially be summarized as follows.

In 2003, DDO (then a borough of Montreal) issued a request for proposals regarding the sale of a plot of land coupled with the obligation to build a seniors’ residence on it. Canada Inc. was the only party to submit a proposal, which included plans drawn up by an architect named Miljevic. Following a referendum on the demerger of Montreal’s boroughs, DDO decided to postpone the sale, and Canada Inc.’s proposal lapsed.

In 2006, DDO again became a separate municipality and discussions resumed between it and Canada Inc. In June 2007 DDO adopted a resolution authorizing the sale of the land to Canada Inc. subject to the conditions stipulated in a promise of sale attached to the resolution. There was no reference in the resolution or the promise of sale to Canada Inc.’s 2003 proposal or to Miljevic’s plans.

In February 2008 the parties signed a promise to purchase, which included a timetable calling for the completion of certain steps by June 2008. The following wording was added after the clause on the obligation to build on the land: “The site is subject to an architectural integration bylaw and the buildings must conform to the submissions already made, except divided in two parts.”

On August 8, 2008 the parties signed the deed of sale, which reproduced the timetable and the above wording concerning the obligation to build. By that date, however, the timetable for the work could no longer be respected. Over the following months, Canada Inc. submitted its preliminary plans to DDO’s urban planning department. During that same period, Miljevic published a legal hypothec against the property sold to Canada Inc. for services rendered to Canada Inc. in 2003 and not yet paid for.

DDO then took the position that Canada Inc.’s project must follow the plans prepared by Miljevic in 2003. The mayor even insisted that Canada Inc. pay Miljevic’s claim before any discussion of the construction plans took place. This led to an impasse, and DDO consequently sent Canada Inc. a demand letter, following which it went to court to seek the dissolution of the sale. In a counterclaim, Canada Inc. too sought the dissolution of the sale, plus reimbursement of the sale price and the municipal taxes it had paid since the sale.

In its judgment, the Court concluded as follows:

[110] [TRANSLATION] Having determined that the sale contract did not oblige Canada Inc. to follow Miljevic’s plans and that the agreed-upon timetable could not be applied to the letter because of the date on which the deed was signed, the Court concludes that the grounds raised in the demand letter of December 18, 2009 and in the resolution of March 9, 2010 do not justify the City’s exercise of the repurchase right.

[111] In addition, the rash behaviour of the Mayor during the June 2009 meeting underscores the existence of considerations extrinsic to the sale contract for not examining the projects submitted by Canada Inc.

[112] It is not necessary to deal with the arguments raised by the City regarding the amendments to Canada Inc.’s share structure. Even if the clause in the deed of sale could be deemed not to have been respected (which does not seem possible given the wording used) the repurchase right is not the sanction provided for.

On appeal, the Court of Appeal concluded that the trial judge had not committed a reviewable error. It also added the following:

[16] [TRANSLATION] Performance of the project required close collaboration between the parties at each stage. This collaboration was an implied obligation under the contract. But the moment the appellant manifested its intention to exercise its repurchase right on unjustified grounds, it was clear that it no longer had the intention to collaborate with the respondent to see the project through to completion. In addition, the appellant’s unjustified position that the project did not respect the 2003 plans effectively added a non-existent condition to the contract, thereby creating an obstacle to its performance by the respondent. As provided in Articles 1590 and 1604 CCQ, the dissolution of a sale cannot be pronounced where there is unjustifiable non-performance of an obligation, which was the case in this instance.

This case thus reminds us of the parties’ obligation to act in good faith when exercising rights under a contract. And for a municipality, which is a public body, that obligation is intensified when it effectively acts as both a private party, i.e. a seller of land, and a public body called upon to exercise its power to assess a construction project.